Success reinforces regulator's resolve to prevent, control, withstand woes

China's efforts to prevent, control and withstand financial risk through various means are continuing even as it faces greater downward pressure amid COVID-19, regulatory officials said.

China has preliminarily established the basic framework of a fund for ensuring financial stability and raised 64.6 billion yuan ($9.55 billion) in the first round of funding, said Qi Xiang, spokesman and head of the law and regulation department of the China Banking and Insurance Regulatory Commission, at a news conference held by the State Council Information Office on Thursday. The fund will be used to deal with potential systemic risks.

Since the beginning of this year, the CBIRC has promoted risk mitigation at small and mid-size banks. It urged these types of banks to improve corporate governance, strengthen shareholder and equity supervision, and promote the introduction of qualified shareholders and the exit of problematic shareholders.

The regulator has launched a special campaign to crack down on related party transactions, with a focus on opposing shareholders and senior executives who violate laws and hollow out bank assets.

The CBIRC also deepened reforms of rural credit unions and ramped up efforts to dispose of nonperforming loans at small and mid-sized banks. In the first half, such banks in China disposed of nonperforming loans totaling 594.5 billion yuan, 118.4 billion yuan higher than the amount during the same period of the previous year.

In addition, regulatory authorities supported mergers and acquisitions of small and mid-sized banks and pushed each province and each bank to come up with its own solutions for risk mitigation, Qi said.

The CBIRC has also joined efforts since the beginning of this year with the Ministry of Finance and the People's Bank of China, the nation's central bank, to accelerate special local government bond issuances to help small and mid-sized banks replenish capital.

In the first half, the central government granted a combined quota of 103 billion yuan of special local government bond issuances to Liaoning, Gansu and Henan provinces and Dalian, Liaoning province, Qi said.

It is estimated that the allocation of a combined quota of 320 billion yuan will be completed by the end of August, said an unidentified official of the CBIRC on Sunday.

In the meantime, China also launched a crackdown on shadow banking. The broad measure of shadow banking is defined by the Financial Stability Board as credit intermediation involving entities and activities outside the regular banking system.

Thanks to the regulator's relentless efforts, the size of China's shadow banking fell more than 25 trillion yuan from its historical high. By the end of June, interbank wealth management in China declined from over 6 trillion yuan at its peak to around 10 billion yuan, said Liu Zhongrui, deputy director-general of the CBIRC's statistics, IT & risk surveillance department, at the news conference.

"Currently, downward pressure faced by China has been gradually reflected in the financial sector. Some financial products are high-leverage practices with complicated structures and may trigger fairly high potential risks.

"It means high-risk shadow banking may come back in the name of financial innovation. In the next phase, the CBIRC will continue to strictly prevent a rebound of shadow banking and include all kinds of financial activities into the scope of regulation," Liu said.

Up to now, credit asset quality has remained fundamentally stable in China. By the end of the second quarter, the nonperforming loan ratio of China's commercial banks was 1.67 percent, down 0.06 percentage point from the beginning of this year, the CBIRC said.